Buying a home is one of the most exciting things you will do in a lifetime! Whether you are buying your first home or you’re moving up to what will be your forever home, financial preparation is essential. It’s not just about credit scores and down payments, though those are certainly necessary. You must begin with the basics:

Gather Your Paperwork

Paperwork. It’s the bane of the world, and yet, it’s how things get done. You need to make sure you have all your documents in order and ready to go so you can apply for and receive loan approval. 

Documents you are likely to need when buying a home include:

• Financial account statements

• Investment statements

• Pay stubs

• Two (or more) years worth of tax returns

Some lenders may have additional requirements for their purposes, and others may require people who are self-employed, independent contractors, or business owners to provide additional documentation.

Of course, this means you need to begin planning to buy your home for some time before the actual search for the perfect house begins by getting your financial papers and affairs in order.

Clean Up Your Credit

It’s important to do this before you begin applying for home loans as your credit has a substantial bearing on your interest rates. Not only do you want to remove negative inaccuracies from your credit report, but you also want to pay down debt, so that your credit utilization score is low. Credit utilization indicates how much credit you have available vs. how much credit you are currently using. Ideally, you want your credit utilization rate to be 25 percent or less.

For instance, if you have a $10,000 limit on your credit card and have a balance of $3,000, you’re only utilizing 30 percent of your credit. While ideally, it would be $2,500 in this situation, the utilization score reveals to lenders whether you manage your debt responsibly.

Dig Deep to Save for Down Payments and Closing Costs

Down payments and closing costs are separate expenses that are due upfront when buying a home. So, you’ll need to have your target costs saved for both before purchasing your home. Opening a separate account at your credit union can help you to save for these costs and earmarked dollars for this purpose only. 

Down Payment. Ideally, you would save 20 percent or more for a down payment. That is enough, with conventional lenders, to avoid private mortgage insurance (PMI). 

For the average American home, 20% amounts to a pretty big number. For a $200,000 home, a 20 percent down payment is $40,000 - that’s a bit steep! Throw in closing costs and you've got a small fortune to raise - and years to go until you reach your goal.

It's great to put money away towards a mortgage down payment, and while it's true that a higher down payment means you'll have a smaller monthly mortgage payment, this isn’t your only option.

Fortunately, there are programs available and specialized loans that allow you to pay different, lower, down payment amounts to secure the loan. With these types of loans, you will most likely need private mortgage insurance.

Closing Costs. Closing costs range between 2 to 5% of the purchase price of the home. So, they add an additional $4,000 to $10,000 on a $200,000 home that will be due before you take possession, or ownership, of the home.

Being sufficiently prepared, financially, when buying a home can help you remove much of the stress people often experience during the home-buying process. It can also help you make better overall financial decisions.

Buying a new home can easily become a confusing process. We’re here to walk you through each step of the process, one-on-one. Simply stop by any branch location or give us a call at (248) 745-3353 to learn more about how we can help you buy your new home, whether it is your first or your forever home. 

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